Reactor Costs – Checking out a bad analogy

The Canadian Nuclear Association has come up with an analogy to address the high capital costs of nuclear plants. It goes something like this:

We could live in a hotel with no upfront capital costs but most of us choose to pay a high initial capital cost to live in a house.

OK so it sounds cute but in my opinion comparing housing options has nothing with do with building nuclear plants. However, it does inspire me to pursue this capital cost argument a bit further.

Consider that a nuclear plant is built for $10 billion overnight cost. The latter means that not only the labour and material costs but also the cost of the funds borrowed during the time it takes to build the plant are all rolled into one overnight cost. The reactor cost quoted is not unreasonable and is probably a good guess for an Enhanced CANDU 6 (EC-6), the most likely candidate for Ontario’s new reactors.

Since we are talking about the housing analogy let’s go to amortization tables and find that the monthly mortgage payment at a 5% discount rate is about $5.34 per $1,000 borrowed in order to pay off the principle and interest in uniform payments over 30 years which was is the amortization period normally used for Ontario reactors. Applying this to the overnight cost we obtain an annual mortgage payment of $641 million.

Let’s assume that the plant is rated at 700 MWe (an EC-6) and it operates at 90% capacity factor. That gives an average annual electricity production of 5.52 billion kWh and thus, to cover the capital cost alone would require a little less than $0.116 per kWh. To this we would have to add O&M, fuel costs, decommissioning and used fuel management allowances and, since we are talking about a CANDU, a provision for refurbishment after 25-30 years.

The wholesale price of electricity in Ontario at periods of normal demand is around $0.02 to $0.04 per kWh. Roughly speaking Ontario Power Generation gets about $0.04 and Bruce Power about $0.06 per kWh wholesale for their generation. The consumer pays about $0.12 per kWh after transmission and distribution costs are added plus subsidies for renewables and debt repayment charges for past reactor construction. The foregoing numbers are a great oversimplification of a complex market structure superimposed over a lot of generally dumb political decisions but they do give us a basis for a rough comparison.

What jumps out at us immediately is that a $10 billion EC-6 doesn’t fit in the current economic framework for electricity in Ontario. Just paying the mortgage means the electricity produced is more than two to three times current wholesale prices before any add-on costs. Of course, there are many ways to play with the assumptions and juggle the numbers. Project finance and accounting experts know a myriad of dodges and tricks to come up with any cost of electricity one might desire. Low balling the initial cost to get the project approved is almost standard in the industry but can be counteracted to some extent by Blackett’s observation that the announced project cost should be multiplied by π to estimate the final project cost.

I like the following quote by David Fessler writing about investing in uranium (Jan 29, 2013)

“With regard to plant construction costs, natural gas is to nuclear as Wal-Mart is to Saks Fifth Avenue.”

This observation is proved yet again in Ontario. To fit current economics it looks like the new reactor capital cost should be in the range of $3-5 billion which won’t happen. (The capital cost of a comparable natural gas plant would be in the order of $1 billion but after that the economics depends on gas prices.) The usual way of getting around paying realistic amortization on the high capital costs of reactors is to have a government as your banker/guarantor which historically has proven to be the only feasible way of building them.

This also explains why refurbishing existing reactors to extend their useful lives is a much more attractive proposition economically than building new ones. In Ontario we’ve already paid for many of the older reactors but I hasten to add that we are still paying on our monthly electricity bills the construction debt for the four Darlington reactors, completed some 20 years ago.

Maybe the “hotel” in the CNA analogy is natural gas although there are comparatively lower capital costs? Strong reasons for building nuclear plants include mitigating climate change and reducing harmful pollution from fossil fuels but attractive economics isn’t one of them. However, in my opinion government subsidizing of nuclear power, as is done for wind and solar energy, is completely justified and necessary.

The house/hotel analogy just draws attention to this reality and in my opinion should shelved by advocates of nuclear power.

One Response to “Reactor Costs – Checking out a bad analogy”

  1. Resort Globe - FriendFeed Says:

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